04 Nov 2021
Neil Weaver

How the Capacity Market works - Modo Academy

The Capacity Market is essentially an insurance policy against potential blackouts. It’s a mechanism that ensures electricity supply will continue to meet demand as our reliance on intermittent renewable technology grows. Its purpose is to make sure that there is sufficient reliable capacity to cope with severe system stresses, and provide long-term security of supply. The first Capacity Market auction took place in 2014, for delivery in 2018-2019. Successful participants are paid to make sure that they are available to respond, at four hours notice, when there is a high risk that a system stress event could occur, like a high risk of blackouts. This happens very rarely - in fact, there hasn’t ever been a Capacity Market event in Great Britain. Unless there is a Capacity Market event, participating assets will continue to operate as normal.

A whole host of assets are able to participate in the Capacity Market, including new or existing generators, flexible assets, and energy storage. Both fast-ramping assets and assets with longer ramp times can take part, but all technologies are subject to a de-rating factor, which is used to level the playing field between different types of assets.

Essentially, this means that the amount an asset gets paid for participation runs in correlation to the likelihood of them being able to reliably provide their contractually agreed capacity for a set period of time. Therefore, storage assets, such as batteries, are de-rated based on their duration, meaning that shorter-duration storage assets are paid considerably less than, say, open cycle gas turbines or gas reciprocating engines, which can run indefinitely. There are some other caveats to be taken into account. For example, assets providing Frequency Response services do not need to provide power to the Capacity Market, even in a system stress event, but are still paid for their availability. Each year, there are two Capacity Market auctions, held by the Electricity Market Reform Delivery Body - these are called T-4 and T-1 auctions. The numbers here refer to the number of years ahead of schedule that capacity is being obtained for. Therefore, the T-4 auction is for delivery 4 years later, and the T-1 auction is for delivery the following year. In every sense, the T-4 auction is the main Capacity Market auction - it has the longest contracts and the most volume. It is also only open to bidding from participants looking to build new generators. In the T-4 auction, newbuild generators are able to secure contracts for a fifteen-year period, during which time they have an obligation to respond to a Capacity Market event. For developers looking to build new power generation projects, this type of revenue security makes the projects much more appealing to investors. T-1 auctions act as top-up auctions which take place just ahead of the delivery year, so that the ESO ensures it has enough capacity for the following winter. To learn more about how the Capacity Market works, and to see the rest of our Modo Academy series, be sure to explore the Modo platform.